Reward and Risk in Alternative Investments

Reward and Risk in Alternative
Investments
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/bond-investing/reward-and-risk-in-alternative-investments
The point of investing is to make a
profit.

Some folks are happy to stay a percent
or two ahead of inflation and simply
not lose any of their hard-earned
money.

And others would prefer to multiply
their holding every few years.

How do you find success in making
more money and not taking on more
risk?

One of the approaches that have
worked is to pool assets and then
invest in a broad range of more risky
but better paying alternative
investments.

In regard to reward and risk in
alternative investments, we would like
to look back a few years to Michael
Milken and junk bonds and then fast
forward to today and a company that is
selling alternative investments and
wants sell them to masses.

Michael Milken and Junk
Bonds

When he was only a 20-year-old
student at the Wharton School of
Business, Michael Milken read
something written by a member of the
Federal Reserve Board and over the
years put the idea into action.

Companies that were poor investment
risks had to pay much higher rates of
interest in order to sell their bonds.

Investors demanded a higher return
because of the increased risk that the
company would default on its debt.

But, if an investor purchases a wide
range of these bonds, the rate of return
was such that, even with defaults, the
total investment made a better return
than high grade bonds.

Business Insider wrote an article about
Milken that included his conviction for
securities fraud and time in prison
followed by a life of philanthropy.

They describe the invention of
the modern junk bond as the best
thing to come to the world of finance in
recent memory.

To this day, high-yield bonds, as they
are now more genteelly known,
remain a brilliant innovation because
they elegantly solve a simple yet
ubiquitous problem:

They give companies with less than
stellar credit ratings access to capital.

These bonds created and grew entire
industries, such as wireless
communications and cable television,
just as they created and grew
immense pools of wealth.

Their invention combined with the
packaging of credit card receivables,
mortgage payments, and car loans
into securitized products that loosened
lending for individuals has done
nothing less than bring about the
democratization of finance.

In the case of high yield bonds, it
turned out that by packaging them in
large and diverse groups that the risk
was simply part of the cost of doing
business and these investments were
more profitable than bonds issued by
healthy blue chip companies.

This idea has reemerged and brings us
to a look at reward and risk in
alternative investments today.

Is It Investor Populism or
a Con Job?

Bloomberg just published an article
entitled Populism Comes to Wall
Street.

The article is about a company named
YieldStreet, their investment products
and how they would prefer that the
SEC relaxed its definition of a
“qualified investor.”

One of YieldStreet’s founder, Milind
Mehere is quoted as saying this.

“If we don’t change fundamentally
how we save, invest, and actually
make money as a society, there will be
anarchy in 20 or 30 years,” he says.

The company says that they will
democratize high finance and bring
investment opportunities usually
reserved for billionaires and hedge
funds to the average investor.

One of the keys would be to use a
crowdfunding approach.

How do this company and its
investment ideas compare to Milken’s
development of the junk (high yield)
bond industry that revolutionized
finance?

We know from hindsight that the junk
bond idea works.

What YieldStreet wants to do is in its
early years.

Founded in 2015 by Mehere and two
other Wall Street entrepreneurs,
YieldStreet has allowed investors to
put more than half a billion dollars
into exotic debt securities.

More than 80,000 people have signed
up to receive its offering notices.

Since inception, the investments have
an expected internal rate of return of
almost 13 percent and to date haven’t
lost any principal.

In the same period, the S&P 500
appreciated an annualized 9.3
percent.

With many individual investors eager
to juice their returns, some YieldStreet
offerings sell out in seconds.

The thing that is holding this company
back from expanding is the Security
and Exchange Commission or more
specifically its accredited investor rule.

Investopedia defines accredited
investor.

An accredited investor is a person or a
business entity who is allowed to deal
in securities that may not be
registered with financial authorities.

They are entitled to such privileged
access if they satisfy one (or more)
requirements regarding income, net
worth, asset size, governance status or
professional experience.

The point of the law is to protect naïve
investors from losing their money.

A rich investor may be naïve but has
the protection of abundant wealth.

And, a professional investor will have
knowledge and experience needed to
sort out and avoid dangerous
investments.

To the extent that this sort of
investment parallels junk bond funds,
then excluding regular investors seems
undemocratic and exclusive.

But to the extent that investors need to
have more information and expertise
to invest in such a vehicle, the
accredited investor rule is protective.

What Kinds of
Investments Does
YieldStreet Offer?

This gets to the important part of the
discussion of reward and risk in
alternative investments.

Can you package them in such a way
that the sheer earning power of a
bunch of them offset an occasional
loss?

Mehere says YieldStreet has its legal
team looking at a fund structure in
which nonaccredited investors may
participate.

This all makes some people nervous,
because what YieldStreet sells is
unusual.

Many of its offerings involve litigation
finance, in which investors front
money to law firms or plaintiffs
hoping for a big settlement.

More recently the company has moved
into marine finance, allowing
investors to participate in loans for
cargo vessels that transport dry-bulk
goods such as coal or grain.

Or they could jump into a deal in
which vessels are acquired and sold
for scrap.

Each offering is backed by collateral,
but sometimes that’s a litigant’s
contractual obligation to pay
investors back-if there is a settlement-
or the scrap value of a ship.

A bit of investigation by Bloomberg
reveals a concern.

In at least one instance, the guarantee
of a borrower paying on the debt is said
to be backed by their substantial
wealth. But, there is no proof of any
wealth!

Another issue seems to be that the
company’s owners are using this
vehicle do business with separately
owned businesses that they (the
YieldStreet owners) own or control.

There is an issue of how they track and
control any conflict of interest.

Not everyone is excited about this
opportunity.

“The percentage of accredited
investors for whom they are
appropriate is quite small,” says
Barbara Roper, director of investor
protection at the Consumer Federation
of America.

“They like to make it sound like it’s
populist,” she adds, “but this doesn’t
belong anywhere in the portfolio of the
typical retail investor.”

It is our opinion that this may be a way
for the average investor to make more
money on his investment.

The proof will be in how it does over
the years and in how well the company
avoids using itself as a cash cow for its
individual owners and their business
interests.

Reward and Risk in Alternative Investments

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Reward and Risk in Alternative Investments